Competition, Market Structures, and the Role of Government

Market Structures What is the primary aim/goal of businesses? To maximize profits What is competition? Striving against others to reach an objective

4 Types of Market Structure 1.Pure/Perfect Competition –Large number of buyers and sellers –Identical product –Well informed buyers and sellers More CompetitionLess Competition

Pure/Perfecct Competition Many buyer/sellers + Identical Products

Monopolistic Competition Meets all condition of perfect competition except for identical products. –Product differentiation Monopolistic competitors use nonprice competition –Advertising, giveaways, or other promotions More CompetitionLess Competition

Monopolistic Competition Same as pure competition except for product differentiation Gap Levis Lucky

Monopolistic Competition Are these shampoos/conditioners different? Pantene $14.50Frederic Fekkai $54

Monopolistic Competition Are these mascaras different? Maybelline Sisley $4$43

Oligopoly A few very large sellers dominate the industry Oligopolists act independently by lowering prices soon after the first seller announces the cut Collusion: formally agree to set prices Engage in price wars More CompetitionLess Competition

Oligopoly IpodZune

Oligopoly Few producers control supply and price

Coca-Cola Classic Coca-Cola classic Sprite Dasani Barq's Dannon Nestea Rockstar Evian Fanta Fresca Minute Maid Mr. Pibb Powerade Seagrams Ginger Ale & Mixers TAB

Pepsi-co Aquafina Pepsi Mountain Dew Sierra Mist Sobe Lipton Brisk Tea MUG Root Beer Slice Gatorade Dole Juice Tropicana

Cadbury Schweppes 7 Up Canada Dry Clamato Dr Pepper Hawaiian Punch Mott's Orangina Snapple

Toyota Scion Lexus

Chrysler Jeep Dodge

General Motors Chevrolet Buick Pontiac GMC Saturn Hummer SAAB Cadillac

Monopoly Only one seller of a particular product Few monopolies

Monopoly More CompetitionLess Competition One seller dominates the market with no close substitutes

Monopoly Natural Monopoly - efficient production by a single supplier

Monopoly Geographic Monopoly - small town

Monopoly 1.Technological Monopoly - new invention –Patent: exclusive right for 17 years Segway

Monopoly 1.Technological Monopoly - new invention –Copyright: lifetime + 50 years This telecast is copyrighted by the NFL for the private use of our audience. Any other use of this telecast or of any pictures, descriptions, or accounts of the game without the NFL’s consent, is prohibited.

Monopoly 1.Government Monopoly - government owned businesses

A.Antitrust (anti-monopoly) laws 1.Sherman Act of Clayton Act of Federal Trade Commission Act -- Monopolists tend to produce less and charge more. -- Regulatory Agencies control economic behavior (Dept of Justice, Fed Trade Comm) -- Sherman Act outlawed collusive price fixing and monopolies. -- Strengthened the Sherman Act. -- FTC, with Justice Dept., to investigate unfair competitive practices.

Sherman Antitrust Act 1890 – used in early 19000’s First government law to limit monopolies Gave federal gov’t power to investigate trusts and companies suspected of violating the Act “Antitrust” really means “competition law” Outlaws monopolies

Trusts DEF: A combination of firms or corporations formed by a legal agreement  Especially in order to reduce competition  Standard Trust – came after Standard Oil

Clayton Antitrust Act 1914 Strengthened Sherman Act Prohibit “anticompetitive practices” –Mergers/Acquisitions that lessen competition –One person being a director of competing companies

B.Cases 1.Standard Oil case (1911) – broke-up. 2.U.S. Steel case (1920) – ‘rule of reason’ by Supreme Court that unreasonably restrain trade. John D. Rockefeller controlled nearly all trade for oil and gas. The Supreme Court used the Sherman Act to break up Standard Oil into 34 companies.

Other cases…

In an out-of-court settlement, AT&T divested itself into 22 regional phone-operating companies in AT&T’s deal to buy T-Mobile USA for $39 billion is shaping up to be a heated regulatory battle. It would create the nation’s largest cellular carrier. Lawmakers are already denouncing the deal, saying it will reduce competition in an already consolidated industry.

Countries with Antitrust Laws shown in red

C.Mergers 1.Horizontal 2.Vertical 3.Conglomerate -- Horizontal: merger of two competitors that sell similar products in the same geographic market. Examples are Chase & Chemical Bank, Exxon & Mobile. -- Vertical: firms at different stages of production process. Examples are PepsiCo with Pizza Hut, Taco Bell, and KFC. -- Conglomerate: not horizontal or vertical, different firms in different geographic areas.

Effectiveness of Antitrust Laws Automobiles Blue Jeans Types of Mergers Autos Glass Blue Jeans Denim Fabric A C BD EF Z Y X W VU T Horizontal Merger Conglomerate Merger Vertical Merger -- Most Vertical mergers are approved by regulators.

Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2010: Ran k YearPurchaserPurchasedTransaction value (in mil. USD) 12000Fusion: America Online Inc. (AOL) [23][24] Time Warner164, Glaxo Wellcome Plc.SmithKline Beecham Plc.75, Royal Dutch Petroleum Co.Shell Transport & Trading Co74, AT&T Inc. [25][26] BellSouth Corporation72, Comcast CorporationAT&T Broadband & Internet Svcs72, Pfizer Inc.Wyeth68, Spin-off: Nortel Networks Corporation59, Pfizer Inc.Pharmacia Corporation59, JP Morgan Chase & Co [27] Bank One Corp58, Technofist Inc.Goldspark IT Solution PVT LTD, IncN/A Inbev Inc.Anheuser-Busch Companies, Inc52,000